Life Insurers Paying The Price For The Succes Of Variable Annuities
When life insurers created variable annuities, they thought they had a reasonable competitor to the widely popular mutual funds. It offered customers the possibility of reasonable returns for very little risk, but unfortunately that risk passed onto the insurance companies themselves.
A few years back, no one foresaw the stock market falling by roughly 40% over a short period of time and now insurers are paying the price over the success of their variable annuity investment vehicle. By giving customers the option to pretty much guarantee their principles, insurers have opened themselves up to considerable losses at time when their own investments have taken a beating.
A number of life insurers have received access to the Troubled Asset Relief Program and although at this time only the Hartford looks like it will accept federal funds, that could change quickly. Capital is the lifeblood of any insurance company more so than for any other financial institution due to the inconsistent nature of their liabilities.
The longer the recession drags out, the more likely we will see other insurers seeking to bolster their capital reserves by accessing the federal funds despite the public stigma such an act would entail. Unless we see a substantial recovery in the stock market in the near future, a number of life insurers are still looking at some significant losses in the upcoming quarters.
To be successful, insurance companies need to carefully manage their risk profiles and in this case they failed miserably and could be paying the price for quite some time.
